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Globalization Reverses and Shifts to Regional Supply Chains

 

The Economist Intelligence Unit (EIU) published a report on Wednesday saying the pandemic will reverse globalization by accelerating a move towards the regional supply chain.

China has dominated international trade since the country joined the WTO in 2001. EIU credited the event as sparkling the latest wave of globalization. While multinationals took advantage of demand and supply opportunities in the country.

However, the report noted that the Covid-19 crisis has not only caused a halt but will also reverse globalization. It pointed out that the China-US trade war and rising wages in China had already incentivized some corporations to relocate supply chains to other parts of Asia. The supply chain will be less China-focused and more diverse.

The shift away from China would indicate a broader trend as global firms look for ways to build their resilience following the supply shock coronavirus has induced.

Building quasi-independent regional supply chains in Europe and America, global companies will provide a hedge against future shocks to their networks.

Some companies have been able to shift their production of key components from one region to another. As factories close and lockdowns continue due to the pandemic.

Supply chain shift will likely be permanent because of the difficulties surrounding their establishment and movement. This is likely especially in the automotive sector.

Other sectors, such as agriculture, pharmaceuticals, and energy, have also come under pressure amid the global health crisis. The crisis has weighed on their supply chains and affected their reliance on China’s economy.

Companies to shift supply chains away from China after the coronavirus

According to Mark Mobius, the founder of Mobius Capital Partners, companies will move their supply chains close to home after the Covid-19 pandemic shock.

Mark thinks the diversification will move supply chains to places such as Bangladesh, Turkey, and Brazil.

Suren Thiru said some businesses in the UK were already shortening their supply chains after the coronavirus disrupted their operations.

Suren Thiru is the head of economics at the British Chambers of Commerce.

Meanwhile, Fraser Howie, an independent analyst, said governments would look to reduce their dependence on China. However, he also noted that there was no way they would ignore China entirely.

Bruce Pang from China Renaissance Securities agreed that China was still a vital partner in the global supply chain since alternative markets did not have a similar scale to support major relocations.

The big picture

The coronavirus anemic was not the only factor that would prompt companies to rethink their supply chains.

In its Wednesday report, it noted that the US-China trade war was likely to continue after the US election in November 2020, regardless of the outcome. Issues of technological dominance drives tensions between the two world superpowers.

Climate change will also become importat for corporates, analysts emphasize. They predicted that the global economy will shrink by 3% by 2050 because of natural disasters and other environmental issues.

Therefore, analysts said managing risks to avoid severe threats to operations will remain a central requirement for multinationals.

Market watchers have been predicting an unravelling of globalization since the outbreak of coronavirus.

Last year, Eoin Murray, the head of investments at Hermes Investment Management, said the international trade was unlikely to exist in the future; instead, a regional trading system would replace it.

Geopolitical tensions will also reverse globalization, warned Hans Redeker who is the head of FX strategy at Morgan Stanley.

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